Mongolia’s Role in the New Silk Road

When China held its Belt and Road Forum for International Cooperation in Beijing May 14 to 15th, China’s President Xi Jinping welcomed Mongolia’s efforts to help link the European and Asian economies.

China welcomes cooperation with Mongolia in areas of trade and investment, agriculture, industrial growth, and energy development. President Xi suggested that China Belt and Road Initiative complements Mongolia’s own Prairie Road development initiative. Cooperation is also important to promote a China, Mongolia, Russia economic corridor.

President Xi advocated for a study of establishing a Free Trade Zone on the Border wth Mongolia, and increasing economic cooperation between the countries, including cooperation on major mineral industry programs and infrastructure.

Prime Minister Erdenebat of Mongolia indicated cooperation with China is a Priority for Mongolia, and said China’s Belt and Road initiative is important for promoting development in Mongolia. According to Erdenebat, Mongolia may play an important role as a link between Europe and East Asia.

Mongolia is well placed between major powers Russia and China to serve as a conduit for economic and cultural exchange. Mongolia suffers from a lack of population compared to its large southern neighbor, however, Mongolia’s rich mineral resources mean Mongolia will be able to generate foreign interest and income for years to come. With budgetary reform in Mongolia well underway, further integration with China and Russia is one more positive development for the future of the Mongolian economy.

Trading Bitcoin (and other Crypto-Currencies) in Mongolia

Following our recent post on foreign exchange trading in Mongolia, we had several inquiries regarding trade of crypto-currencies, such as Bitcoin. While there are no specific regulations in Mongolia addressing use or trade of crypto-currency, both Foreign Exchange and electronic payment and remittance services are allowed under the current regulatory framework, with only a permit required.

A Bitcoin trading (or mining) operation can be established in Mongolia relatively easily. One will only need to establish a Mongolian corporation. Then application must be made to the Financial Regulatory Commission of Mongolia for the appropriate permit.

Securities Registry Opens Opportunity for Mongolia Business

As we have written about in the past, Mongolia opened an internet based registration system for pledges, in March of this year. In addition to serving as a platform for registration of international pledges for some of the world’s largest financial institutions, the new system has also supported over 10,000 registrations in favor of small and medium sized entities (SME).

The registry, implemented by the Ministry of Justice and Home Affairs, is one part of a major project to reform security backed transactions and financing in Mongolia. Enabled by the newly enacted Law on Tangible and Intangible Movable Property Pledges, the online registration service offers web based filing and public access for security interests on movable collateral in complex financial transactions.

The major benefit of the online platform is the ability of potential financiers to conduct a web-based search on property held by potential partners, to determine if the property offered up for collateral is already subject to a previously existing pledge or other security. This information will have a major impact on the business of lenders and will hopefully make potential lenders more likely to make funds available to a borrower after they are able to confirm there are no other securities on the proposed collateral.

According to The Financial, 38% of the more than 10,000 overall registrations are for equipment, 25% are for livestock, 5.4 percent are receivables, and 1.7% are vehicles. These stats suggest that local farmers have been quick out of the gate to take advantage of the new opportunities opened up by the new registration system and the availability of additional financing to promote development and growth.

Foreign Exchange in Mongolia

Financial Regulatory Commission (the FRC) and Bank of Mongolia (Mongol Bank), which serves as the central bank of Mongolia, are authorized to regulate Foreign Exchange (ForEx) trading within Mongolia. The Law on Currency Settlement is the primary legislative authority as to conduct of ForEx in Mongolia.

The currency market of Mongolia operates on the basis of supply and demand and consists of the currency exchange activities of the authorized banks, exchanges and brokerage companies.

Mongol Bank is permitted to buy currencies and gold bullion from domestic and foreign banks, as well as from business entities, other organizations and from individuals. Mongol Bank’s primary official purpose for such purchases is management of currency and wealth reserves of Mongolia. Mongol Bank may likewise sell foreign currency and gold from its reserves as part of efforts to maintain the general stability of the Tugrug (the currency of Mongolia).

Mongol bank acts to fix the official exchange rate of the Tugrug, and to provide guidance as to the same. These fixed rates are set in relation to currencies which are bought and sold on the currency market by commercial banks on a comparative basis against a stable foreign currency used in foreign commerce by a majority of countries. The rate fixed by Mongol Bank is used in the State budget and for customs purposes.

An increase or decrease in the Tugrug exchange rate by 5 percent or more from the previous day shall be brought to the attention of the Prime Minister of Mongolia. This is only report and the Prime Minister has no authority to personally order or to prevent the Governor of Mongol Bank from increasing or decreasing the Tugrug exchange rate in accordance with market conditions.

Mongol Bank also sets various rules and regulations regarding foreign exchange activities, including as to FX swaps, forward transactions, and Forex auctions.

Commercial banks are able to establish their own exchange rate for using Tugrugs to buy and sell foreign currencies based on market conditions. Likewise the bank sets its own rate of commission.

Upon obtaining a license from Mongol Bank, Mongolian Commercial banks are allowed to facilitate non-cash transactions in foreign currency, buy and sell foreign currency in cash, establish and operation accounts in foreign currency (and pay required interest), provide credit and provide guarantees in foreign currency.

A Non-banking financial company may trade foreign currency after obtaining a license from the FRC.

New Liabilities for those who Advise Mongolia CEOs

Parliament has recently passed a bill to amend the Mongolia Criminal Code. The Amendments will create new liabilities for adviser’s of corporate CEOs, whose actions result in offenses such as money laundering, terrorism, bribery, environmental abuse, actions that threaten the nation’s economic security, or the abuse of state property.

Under previous law, only the CEO his or herself could be held liable in such cases. The amendments will hold those around the CEO, who advised or pressured a certain course of action to also take responsibility.

These changes will apply not only to private corporations, but also to state owned enterprises. It is interesting to note that while the Criminal Code previously contained over 80 items imposing certain legal liabilities on legal entities such as companies, the amended Code now has less than 30.

This is in general expected to make it easier to establish and operate a new company in Mongolia. The intention of the law appears to be to make it easier for companies to do business by providing more free dome of operation, while at the same time increasing liability for offenses at the top levels.

MONSTAT Improves Mongolia’s Data and Statistics Capability

After the financial crisis in 2008 and a series of harsh winters, Mongolia took a few years to recover. As part of the recovery, the government set out a wide reaching development strategy, and setting 6 development goals. The government quickly realized that implementation of its strategy would relied heavily on up to date data and statistics. It recognized that Mongolia needed to improve and modernize its internal statistic generation and analytical capabilities in order to effectively implement its new strategic development plan. Mongolia’s old state statistics system was oriented to service the old state lead planned economy from years past. It required a major reorientation to address the needs of the emerging market economy.

The government of Mongolia approached the World Bank for assistance in implementing a new statistics system under a reorganized National Statistical Office (NSO). The World Bank worked with the government to develop the Strengthening of the National Statistics System of Mongolia (MONSTAT) project, designed to generate and distribute, meaningful, accurate and current statistics data, to promote evidence based law making in support of the government’s strategic development agenda.

The first step was to improve institutional, regulatory and policy framework for statistics collection, as well as to put in place higher standards for statistics collection and recording. Personnel knowledge and skill also required improvement, particularly as to survey techniques and data collection methodology. New technology was acquired and implemented to bring operations into the information age. The project introduced data management and quality standards of the EU.

As a result of the efforts of MONSTAT, use reliability and user satisfaction regarding statistics generated by NSO has increased. NSO has explored and implemented new ways to make statistics information available to the public and to researchers. NSO has implemented systems to improve inter-agency cooperation in data-collection and sharing.

The MONSTAT project and the improvements to the NSO are positive examples of Mongolia’s continuing development. The project has provided valuable information to a rage of government agencies, NGOs, and international organizations, working collectively to make lives better for Mongolians and to build a positive environment for foreign investment. With these improvements to the NSO, foreign investors are better able to develop business plans which rely on internal Mongolian statistics.

Mongolia and Vietnam Promote Trade in Goat Meat

Vice President of Vietnam, Mrs. Dang Thi Ngoc Thinh, visited Mongolia for an official visit from May 07 -10. While in Mongolia, she participated in the Mongolian Vietnamese business forum in Ulaanbaatar on May 09. Mrs. Dang Thị Ngọc Thinh gave a presentation at the opening ceremony of the business forum discussing trade, investment and economic cooperation between Mongolia and Vietnam.

Vietnam’s trade volume with Mongolia is estimated at USD 59 million in 2016 alone. The trade includes over USD 40 million in race, sugar, canned foods and telecommunications equipment imported to Mongolia. Mongolia and Vietnam seek to increase cooperation and trade in natural resources and agricultural goods, which Mongolia is well placed to export to Vietnam.

Three main issues were touched on during the official talks between Vietnam’s Vice President and the Prime Minister of Mongolia. These included promotion of defense ties and cooperation between law enforcement agencies.

Also discussed was increased export of Mongolian meat products to Vietnam, particularly goat meat. Mongolia is scheduled to export 20 tons of goat meat to Vietnam this year, and trade is expected to grow significantly.

The agreement on export of goat meat highlights one of Mongolia’s current strengths in agricultural production of meat and dairy. The sector is ripe for foreign investment, including funding, technologies and techniques.

Tracking Manufacturer of Imported Counterfeit Product in Mongolia

A client recently asked our firm’s Mongolian intellectual property lawyers for assistance regarding counterfeit products which were being sold in Mongolia. It seems the details of the manufacturer’s identify and contact information as listed on the packaging were false, so the client needed our assistance in identifying the actual importer and manufacturer. Records of the importer would be kept by Mongolian customs, but these records cannot be accessed by everyone. We presented with their options for gaining access to this information.

 If there is an officially appointed distributor in Mongolia for the authentic products which are the subject of the counterfeit, this official distributor may approach Mongolia Customs, provide the contract granting it authority to distribute the relevant products in Mongolia, and request that Customs provides the name and information of the importer. This is the simplest and most straight forward course of action, but requires an existing distribution contract with an authorized Mongolian importer.

Once information on the importer is obtained from Customs, a complaint on the counterfeit goods and trademark may be made to the Mongolian Intellectual Property Office, and to Customs. The IP Office will conduct its own investigation, and will issue a report as to the suspected infringement. Assuming the report of the IP Office finds infringement and counterfeit goods, the Customs Office will stop import of the fake goods at the border. Requests may also be made to the IP Office and to Customs that they provide the authentic goods manufacturer with the officially registered name of the manufacturer to allow us to independently pursue legal actions.

However, authentic manufacturer does not have an official distributor for its products in Mongolia, the stores which are selling the counterfeit products in question must be identified, and evidence of the counterfeit goods compiled. Then a report on the counterfeit products and stores selling the goods must be submitted to the IP Office, which will then initiate an investigation and will issue a report. As above, the report of the IP Office may be shown to Mongolia Customs in order to have them stop import of the counterfeit goods.

One other option for identifying the true identity of the manufacturer will be to contact local sellers of the counterfeit products in Mongolia directly. As can be imagined this may be a long process without a real guarantee the sellers would cooperate to provide the information requested. These sellers can be presented with the legal consequences for their failure to cooperate. If the seller only knows the identity of the local Mongolian distributor, the distributor will have to be approached for information in the same way.

We will not here that Mongolia does not have a reliable “private investigator” sector so any investigative inquiries at the local stores and distributors will need to be made by an attorney.

Mongolian Free Trade Zones

In 2016, matters related to Free Trade Zones (FTZ) came under the power of the Deputy Minister. There are three FTZ in Mongolia: Zamiin-Uud, Altanbulag and Tsagaannuur. The Law on FTZ was revised in 2015 to enabled and promoted the cooperation between private entities and public authorities in developing FTZs.

Altanbulag Free Zone in Selenge province covers 500 hectares of land. Since the establishment of Mongolian FTZs, MNT 35 billion has been allocated by State Budget and 77 per cent of the budget was invested to the infrastructures of Altanbulag Free Zone. At the moment only Altanbulag has drawn investment from private entities, which totals MNT 6.2 billion.

Zamiin-Uud Free Zone in Dornogobi province covers 900 hectares of land. In 2010, Development of Zamiin Uud infrastructure project started with soft loan of the Government of China which totals USD 58.8 million. The project performance is 95 per cent. As of this day, 23.6 hectares of land are in possession of 13 private entities for the purposes of trade, service, hotel, manufacture, storage, logistics and gas station.

Tsagaannuur Free Zone in Bayan-Ulgii province covers 708.4 hectares. 115 hectares are in possession of 5 private entities.

The Deputy Minister Khurelsukh Ukhnaa has stated that the Free zones are in need of accelerated foreign and domestic investment and noted that the Parliament and the Government should start establishing joint FTZ areas with bordering countries. Deputy Minister Office and Ministry of Foreign Relations are working on research and assessment and negotiating with Chinese authorities about a potential new joint FTZ.

Mongolia Tax on Gasoline and Diesel Fuel

We continue to introduce various Mongolian taxes to be aware of. The Law on Gasoline and Diesel Fuel Tax was adopted on June 2, 1995, yet only came into force on  June 6, 1995.

According to this law, the tax is levied on all types of gasoline and diesel fuel whether produced within the territory of Mongolia, or imported into Mongolia. This tax is levied on every ton of fuel calculated as follows.

Gasoline up to 90 octane will be taxed at 20,350 MNT per ton, while gasoline with octane over 90 will be taxed at 25,700 per ton. Diesel fuel will be taxed at a substantially lower rate of 2,140 MNT per ton. This suggests the government recognizes the importance of diesel fuel in economic activities such as logistics and transportation of goods.

This tax is different and in addition to the tax levied on petroleum and diesel fuel in accordance with Law on Excise Tax. The purpose of the Excise Tax is to limit harm to the society or reduce the worst effect of the products as like as international standards. The excise tax on petroleum and diesel fuel is expected to be increased on July 1, 2017 and October 1, 2017 respectively.The tax on gasoline and diesel fuel produced on the territory of Mongolia is levied by the National tax offices and the tax on imported gasoline and diesel fuel is levied by the Customs offices in accordance with the amounts above.

Several changes to Mongolian taxes have been ratified recently by the Mongolian Parliament as a means to raise additional revenue in hopes of improving the state budget. The new implemented tax on gasoline and diesel fuel is primarily intended to raise revenue.